3 Stock REIT Stocks Poised to Overcome Industry Hiccups

Although there has been an improvement in property market fundamentals since the beginning of the pandemic, there are concerns stemming from interest rate hikes to tame inflation, geopolitical issues and the outlook for economic growth. These are impacting leasing activity for multiple asset categories and hurting the REIT and Equity Trust – Other industry’s overall outlook.

But with the industry offering the property structure for numerous economic activities, be they real or virtual, there are pockets of strength even amid its general weakness. Especially with the holiday season around the corner, improving lodging industry fundamentals with the resurgence of business travel and a solid recovery in the US advertising market, VICI Properties Inc. VICI, Lamar Advertising Company LAMR and Chatham Lodging Trust CLDT is likely to benefit.

About the industry

Zacks REIT and Equity Trust – Other Industrial is a diversified group that covers REIT stocks from various asset categories such as industrial, office, lodging, healthcare, self storage, data center, infrastructure and others. The equity REITs lease space in these properties to tenants and earn rental income. Economic growth plays a central role for the real estate sector, as economic expansion translates into greater demand for real estate, higher occupancy levels and the increased power of landlords to ask for higher rents. The performance of Equity REITs also depends on the underlying asset dynamics and location of properties. So it is important to delve into the fundamentals of these asset categories before making any investment decision. It is important to find out whether the pandemic-induced behavior results only in a short-term impact or long-term structural changes.

What Shapes the Future of the REIT and Equity Fund – Other Industry?

Price increase, geopolitical tension increases: The recent rate hikes by the Federal Reserve to tame inflationary concerns are a concern because REITs’ reliance on debt for business is more compared to other industries. This makes investors skeptical of their performance in an environment of rising rates. Since the investment world treats REITs as bond substitutes due to their high and consistent dividend-paying nature, these companies are susceptible to rising interest rates. This is why REITs’ price performance tends to fluctuate when the Fed is optimistic about raising interest rates. In addition, geopolitical tensions have affected the commodity market and thereby boosted inflation. Furthermore, downside risk to the outlook for economic growth has increased. This has raised concerns about the performance of REITs, as economic growth plays a central role in shaping demand for real estate. In fact, leasing activity is negatively affected due to economic uncertainty, high inflation and rising interest rates.

Inflationary pressures and supply chain issues: Inflationary pressures and supply chain issues have pushed up property operating costs, and any significant turnaround is likely to remain elusive in the near term. With a tight labor market and continued supply chain issues, personnel and repair and maintenance and material costs, as well as costs of development and expansion activities, are expected to increase for Equity REIT shares.

Demand for certain asset categories continues to improve: However, demand for certain asset categories remains robust, while a number of property types that once faced a severe blow due to the pandemic are now on the road to recovery. Sectors such as industry, infrastructure and data centers that support the digital economy are likely to continue to flourish for the foreseeable future. In the long term, apart from the rapid adoption of e-commerce, logistics properties are expected to benefit from a likely increase in inventory levels. Enterprises’ growing reliance on technology and acceleration in digital transformation strategies present enormous opportunities for data centers and REITs. Migration and downsizing trends, redevelopment and an increase in the number of people renting homes have escalated the need for consumers to rent space in a storage facility to park their belongings, benefiting the self-storage REITs. In addition, there is increased optimism backed by the accommodation industry’s rebounding fundamentals, with strong leisure demand and improved demand from companies and groups. In addition, healthcare REITs, poised to benefit from strong demographic demands amid the aging baby boomer generation, are seeing an improvement in senior housing occupancy due to widespread vaccination efforts. Office REITs, which were hit hard by the pandemic-led job cuts and a remote work environment, are expected to gradually benefit from the increase in office-using employment and back-to-the-office initiatives.

Zacks Industry Rank indicates a gloomy outlook

Zacks REIT and Equity Trust – Other Industry is placed in the broader Financials sector. It has a Zacks Industry Rank #157, placing it in the bottom 38% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates a bleak near-term outlook. Our research shows that the top 50% of Zacks Rank industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative expectations for funds from operations (FFO) per share for the combined companies. Looking at the total revisions of FFO per stock estimate, it seems that analysts are losing confidence in this group’s growth potential lately. Over the past three months, industry estimates for 2022 FFO per share have fallen 0.6%. The same for 2023 has moved 5.5% south over the past year.

Before we present a few stocks that you might want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry lags on stock market performance

REIT and Equity Trust – Other Industry has underperformed both the S&P 500 composite as well as the broader Zacks Finance sector over the course of a year.

The industry is down 20.8% during this period, compared to the S&P 500’s 17.3% decline. Meanwhile, the broader financial sector is down 13%.

One-year price performance

The industry’s current valuation

On the basis of the forward 12-month price-to-FFO ratio, which is a commonly used multiple for valuing REIT – Others, we see that the industry is currently trading at 15.16X compared to the S&P 500’s forward 12-month price – to earnings (P/E) of 17.60X. However, the industry trades above the financial sector’s forward 12-month P/E of 13.66X. This is shown in the chart below.

Forward 12-month price-to-FFO (P/FFO) ratio

Over the past five years, the industry has traded as high as 22.10X, as low as 14.25X, with a median of 17.72X.

3 Equity REIT – Other stocks worth investing in

VICI Properties Inc.: New York, NY-based VICI Properties Inc. is an experiential REIT engaged in owning, acquiring and developing gaming, hospitality and entertainment destinations.

VICI Properties enjoys ownership of three of the most iconic entertainment facilities on the Las Vegas Strip, namely Caesars Palace Las Vegas, MGM Grand and Venetian Resort Las Vegas. The company has made a concerted effort to expand its portfolio and join forces with best-in-class tenants. Such efforts are likely to help VICI’s performance in the coming quarters.

VICI currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2022 FFO per share of $1.91 reflects an increase of nearly 5% year over year.

Furthermore, over the past month, the Zacks Consensus Estimate for 2023 FFO per share has witnessed a 1.5% upward revision to $2.07, reflecting analysts’ positive outlook. VICI Properties’ long-term growth rate is expected to be 5.40%. The stock is also up 6.6% so far in the quarter.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lamar Advertising Company: Headquartered in Baton Rouge, LA, Lamar Advertising Company is one of the largest owners and operators of outdoor advertising structures in the United States. This REIT offers advertisers a wide variety of billboard, interstate logo, transit and airport advertising formats, enabling local businesses and national brands to reach a wide audience on a daily basis.

Lamar Advertising’s encouraging third-quarter results reflected better-than-expected revenue helped by the solid recovery in the U.S. advertising market and continued sales momentum across its billboard, transit and airport and logo businesses.

Lamar Advertising is well positioned to take advantage of its impressive footprint of outdoor advertising assets throughout the United States and Canada. In addition, the company’s unrivaled logo business and diversified tenant base across various sectors act as tailwinds.

Technological advances are helping the shift to the low-cost, out-of-home advertising platform. Furthermore, Lamar’s strategic buyouts to expand its portfolio bode well for its long-term growth.

LAMR currently has a Zacks Rank #2. The Zacks Consensus Estimate for Lamar Advertising’s 2022 and 2023 FFO per share have moved 1.4% and 2.8%, respectively, over the past month. The stock is also up 16.3% so far in the quarter.

Chatham Lodging Trust: Headquartered in West Palm Beach, FL, this lodging REIT invests in exclusive extended-stay and premium-branded select hotels. CLDT is poised to capitalize on its well-located properties in markets with strong demand drivers.

This increased optimism is supported by the lodging industry’s rebounding fundamentals with the resurgence of business travelers. The company’s top business travel markets are experiencing year-over-year growth, and CLDT has the capacity to capitalize on the growth potential.

Additionally, the recent trend in 2022 FFO per share estimate revisions indicates a favorable outlook for CLDT, with estimates moving 7.3% north over the past month. This also indicates a significant year-on-year increase. CLDT currently has a Zacks Rank #2. The stock is also up 28.4% so far in the quarter.

Note: Funds from operations (FFO) is a widely used metric for measuring REITs’ performance rather than net income, as it indicates cash flow from their operations. FFO is obtained after adding depreciation and write-downs to earnings and deducting capital gains.

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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